Educational Articles

Leading Indicators

Harvey S. Katz

Once a month, the Conference Board, a nongovernmental organization, issues its report on the Leading Economic Indicators, commonly called the Leading Indicators. Actually, it is a three-part report, taking in the Leading Indicators, the Lagging Indicators, and the Coincident Indicators.

The Leading Indicators are indicators in economics and finance used to forecast the future. Such indicators are designed to predict the state of the economy in the coming months. These so-called leading indicators include: the average workweek, initial claims for unemployment insurance, building permits, the money supply, inventory changes, orders for consumer goods, and the stock market. These indicators will typically change before the aggregate economy changes. Of the three parts of the series, the leading indicators are the most important and the most widely followed. The time period normally considered is six months. Hence, the stock market often rises or falls in anticipation of a meaningful change in direction for the economy. Equity markets traditionally start to rise before an economic recovery commences or interest rates fall. Conversely, bear markets, or declines in equity values of more than 20%, often herald the start of a recession or a notable rise in interest rates. For example, the bear market that commenced in October 2007, led the onset of the subsequent recession by several months.

The Coincident Indicators, as the name implies, gauge the course of events that unfold at about the same time that the economy changes. The most noted coincident indicator is also one of the most important economic series, the Gross Domestic Product. That quarterly data point measures the total economic output of the economy, including exports, but excluding imports. Other coincident indicators include the number of employees on non-agricultural payrolls, personal income, industrial production, manufacturing activity.

Finally, there are the so-called Lagging Indicators. These are indicators that do not change until several quarters after the economy, at large, changes. The most celebrated of the lagging indicators is the nation's rate of unemployment. This is a lagging indicator as employers, at the start of a business recovery, will first opt to pay current workers for overtime; then, they will choose to bring on temporary workers; finally, they will hire full-time permanent workers. Once this latter category rejoins the workforce, the unemployment rate starts to dip. That can be several months, or more, after the onset of an economic recovery. Other notable lagging indicators are: commercial and industrial loans, the Consumer Price Index, labor costs per unit of output, and the average prime interest rate charged by banks.